Gap profit up 25 pct, sees higher marketing costs

By Alexandria Sage

SAN FRANCISCO (Reuters) - Gap Inc posted a 25 percent rise in quarterly profit as sales rebounded at its Old Navy chain and the company recorded its highest margins in a decade.

The apparel retailer, which is now running television commercials, said it plans to boost marketing costs for the holiday season in a bid to gain market share.

The company has enjoyed a revival in sales at its lower-cost Old Navy chain due to better merchandising. But sales at Gap stores, as well as its more upscale brand Banana Republic, have remained lackluster.

Wall Street Strategies' analyst Brian Sozzi cited momentum at Old Navy and improved margins as positives.

"Considering the company is up against ever difficult merchandise margin comparisons, achieving such gains is no small feat in a still competitive specialty apparel market," Sozzi wrote in a research note.

Gap has kept a tight rein on costs to protect profit margins, but said its operating expenses would be up between $100 million to $120 million in the fourth quarter versus the prior year, with marketing expenses up about $45 million.

"We will save money where its appropriate but also make targeted investments where we think we can move the needle -- particularly when it comes to growing the business and moving top-line sales forward," Chief Executive Glenn Murphy told analysts during a conference call.

Shares in the company fell 1.4 percent in extended trading, which Sozzi attributed to the additional investments.